If all goes according to plan, Uber should raise more than $5 billion in “venture capital” funding this year. It’s a record haul that reflects the ride-sharing company’s antipathy toward going public right now, despite billions of dollars in revenue, an exponential growth rate and a bull market that refuses to bear down.
And it’s hard to blame Uber for staying private. Google (GOOG) didn’t want to go public when it did. Neither did Facebook (FB). But both had their hands forced by something called the 500-shareholder rule, which was subsequently eviscerated by the 2012 JOBS Act. Uber, on the other hand, has virtually no reason to make a move that inevitably leads to short-term earnings pressures and endless meetings with Greenwich hedge fund managers who think they know more about your business than you do.
Moreover, there is a good case to be made that Uber wouldn’t be a good public company. Its CEO is combative even by Silicon Valley standards, and is almost certain to rub some Wall Street analysts the wrong way. Plus, Uber’s endemic regulatory (or worse) controversies could play havoc with its stock price. Only traders with the strongest stomachs need apply.
Only trouble is that Uber must eventually provide liquidity for its shareholders (both outside investors and vested employees). These folks love a good rocket-ship ride as much as anyone, but eventually want their moon rocks. That’s probably why the San Francisco-based company has begun tacitly planning for an IPO, as evidenced by the way in which it structured its ongoing private placement of convertible notes with wealthy Goldman Sachs (GS) clients.
But there is another way. Uber could remain private indefinitely by selling a control stake to Warren Buffett.
To be sure, Buffett could afford it. Berkshire Hathaway (BRK.A) has a current market cap of $370 billion, including nearly $60 billion in cash. Uber currently is valued at only $40 billion, and isn’t believed to have any debt on its books. Buffett could pay a slight premium, use some leverage and walk away with a 51% stake for much less cash than he currently has tied up in Wells Fargo (WFC).
There also is a compelling case to be made that $40 billion is a “value” price, no matter how wide our collective eyes bulged when we first read it. Remember, plenty of other experienced investors are buying in at this valuation expecting asset-light Uber to be worth at least $100 billion at IPO — and many pundits called Fidelity nuts to invest at a $17 billion pre-money just six months ago (similar accusations were hurled at TPG and Google Ventures for giving it a $2 billion+ mark in the summer of 2013).
Plus, Buffett could always insist on some special warrants that allow him to increase Berkshire’s position as Uber matures and overcomes various regulatory hurdles.
More importantly, I think that Uber is a decent fit within Buffett’s investment strategy. Here are four reasons why:
- It’s a business Buffett could understand. For all of its tech trappings, Uber is essentially a transportation company that eventually wants to expand into a localized, on-demand logistics company. In fact, a company like Burger King is probably more data-intensive. Plus, just in case the tech thing still trips you up, remember that Buffett is the largest outside shareholder in IBM (IBM), with a 7.12% stake.
- Real revenue: Uber is not some sort of SaaS business whose income statement is full of asterisks about future bookings. It generates revenue with each and every ride. (Update: An earlier version of this said Uber is profitable — it isn’t and never has been. Apologies for the error).
- Moat: To be sure, Uber is in a highly-competitive market. But it is by far the best capitalized of any competitor, has first-mover advantage in most of its markets and has begun to sign all sorts of “preferred use” corporate partnerships. Plus, if you believe the long-term plan, it is the only on-demand ride company out there that currently has a large enough footprint (in terms of both geography and data) to pull off local delivery on a mass scale.
- Management rationality: This is a tricky one, given Kalanick’s antagonistic stance and its consequences in terms of both regulation and PR. Ultimately, however, it seems that Kalanick has made a conscious choice that the only way for a company like Uber to succeed is by being brash, even if that means sometimes crossing the line of decency. While it has generated all sorts of unpleasant headlines, the business itself hasn’t seemed to suffer, and Buffett can easily shake off some media darts (see Burger King to Canada or the horribleness at Heinz). Coldly-calculating seems to be fine in Omaha, so long as the math checks out.
The one area where I could see Buffett having a real problem, however, is transparency. All sorts of existing Uber investors privately gripe about their lack of visibility into company financials and strategy, and word is that Uber wasn’t even too forthcoming when pitching its convertible note deal to Wall Street banks (Goldman wasn’t the only one approached).
But no current shareholder has company control, which can allow them to be easily excluded from the inner circle. Highly unlikely that happens with Buffett, both because of his legal rights and his grandfatherly gravitas. Moreover, one possible reason for Uber’s reticence to share information is concern over leaks — something which is much less likely when dealing with a single outside shareholder. Plus, any debt could be structured as Rule 144a for life, thus keeping underlying information private.
Remember, Uber would have all sorts of incentive to open the kimono to Buffett, because he’d be the one “saving” them from having to go public. Yes there are other theoretical buyers — Amazon (AMZN) and existing Uber shareholder Google (GOOG) come to kind, given their local delivery aspirations — but neither one of them is likely to give Kalanick much rope.
Today’s successful startups almost never remain private and operationally independent. But Uber has been the exception to so many other rules, why not one more? Make the call Warren. Even if it sounds ridiculous at first blush.
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